KARACHI: The bank lending to the private sector remained negative in the first half of the current fiscal year reflecting a pathetic economic growth scenario.

       Data released by the State Bank of Pakistan (SBP) on Tuesday showed that the private sector had been retiring its debts from July 1 till Dec 15. The net debt retirement during this period was Rs41 billion compared to net borrowing of Rs141in the same period last year.

       Bank advances to the private sector took a steep plunge to just Rs208bn in FY23 compared to Rs1,329.7bn in FY22, which resulted in GDP contraction in the year.

       However, the situation looks more fragile than last year and almost all macro indicators are reflecting a grim economic outlook. The banks are making huge investments in risk-free high-yielding government papers, earning more than 22pc returns.

       The government has set an economic growth target of 2-3 per cent for the current fiscal year but the Large-Scale Manufacturing (LSM) production shrank 4.08 per cent in October on a year-on-year basis. The main contributors to negative growth are textile, paper and board, iron and steel products, electrical equipment, automobiles and furniture.

       However, the LSM output contracted 0.4pc during July-October FY24, according to PBS data.

       The LSM in FY23 shrank 10.3pc which means the current fiscal year is going to face a similar fate too. This is surprising for analysts how the economy could grow without a supply of liquidity. They said negative lending to the private sector is due to the high cost of borrowing and because of this banks are reluctant to lend money to the private sector fearing defaults as the policy interest rate is 22pc.

       Some bankers said that the recent rally in the equity market attracted large amounts from banks helping them to make more profits before the PSX underwent a huge correction losing over 11pc since Dec 12. The banks also succeeded in avoiding 40pc tax on windfall profits after securing stay orders from the courts.

       “The government has been borrowing heavily from banks leaving no space for the private sector while the risk-free huge profits from government papers are one of the reasons for no lending to the private sector,” said a financial analyst.

       The commercial banks noted a net debt retirement of Rs51.4bn compared to the net lending of Rs262bn in the same period of the last fiscal year. However, the Islamic banking branches of commercial banks noted a net lending of Rs13.1bn to the private sector against a net debt retirement of Rs151bn in the same period of FY23.

       The performance of Islamic banks was also poor as they noted debt retirement of Rs2.6bn during this period against net lending of Rs31.4bn in the same period of FY23.

       Published in Dawn, December 27th, 2023